Functional Organizational Structure (Explained: All You Must Know)

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What Is Functional Organizational Structure

A functional organizational structure is a type of company structure where employees and grouped based on their functions, skills, and knowledge.

Typically, you’ll have different departments each having a different function, such as the marketing department, sales, finance, legal, research and development, IT, and so on.

Within each department, there can be a hierarchical structure where you will have a department head, managers, and employees.

Depending on the size of the business, one department can have many management layers where managers have a different span of control.

In general, employees within each functional unit tend to interact with one another.

Although there may be interactions between employees of different functional units, each unit coordinates its own activities and efforts.

Then, every department head will work with other department heads to ensure that the overall operations of their department are aligned with the overall corporate strategy.

Keep reading as I will further break down the meaning of a functional organizational structure so you know more about it.

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Functional Organizational Structure Advantages

Adopting a functional organizational structure can have several key advantages.

The most notable advantage is that employees with similar skills and knowledge are grouped together in one unit.

By having employees who have a common understanding of their functions, the company can divide tasks more efficiently and each employee within the department will know exactly what’s expected of them.

When employees are clear in their roles and responsibilities, the company avoids duplicate work, and redundancy in tasks, and can increase profitability.

Another advantage of having a functional organizational structure is that the company hierarchy is clearer for the employees.

In other words, an employee will have one manager and will be accountable to that person.

On the other hand, in other company structures, employees may have more than one manager making it more challenging for them to execute their tasks.

A third advantage is that other functional units will have a better understanding of who is responsible for what.

For example, the sales department will know that it should coordinate certain activities with marketing.

Marketing may need to coordinate with the product team, and so on.

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Functional Organizational Structure Disadvantages

Although functional organizational structures have particular advantages, you should also be mindful of the drawbacks.

The most important disadvantage in functional organizational structures is that departments tend to operate independently of others.

This effect is called the “information silo” where each department makes decisions without properly consulting with the other departments to understand the impact of their decisions.

When departments function in silos, they may no longer work based on the needs of the entire organization but prioritize their own needs over others.

Also, companies that tend to have strong silios between their functional units will have difficulty implementing new processes, operating changes, and implementing an agile work environment.

Setting up a functional organizational structure can be effective but it must be done right.

Department heads and managers should communicate more closely, consult one another before making important changes, and find ways to educate other departments on their processes.

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Functional Organizational Structure Example

Let’s look at an example of a functional organizational structure to better illustrate the topic.

Let’s imagine that we are looking at a large software company that operates in a market where it consistently produces innovative software products.

In such a company, the employees can be grouped into functional units such as:

• Research and development department 
• Information technology department
• Sales department 
• Marketing department 
• Legal department 
• Finance department 
• Product line units
• Accounting department
• Investor relations
• Purchasing department 
• Human resources 

Research and development will include employees, managers, and department heads that specialize in software development, programming, and related activities.

The Information technology department has the expertise in setting up the company’s tools, systems, and technological needs for each department to get their job done.

Sales and marketing are each responsible for the sales of the software products and their promotion.

Legal handles all aspects of commercial contracts, compliance, corporate governance, and others.

Finance is in charge of the company’s cash, financial investments, budgets, and financial planning.

The product line can be units that are specialized in the company’s various software products and understand the customer and market needs.

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Type of Company Structures

Every company may adopt a different type of company structure that is better suited for their business.

The most common types of company structures are:

• Functional structure
• Product-based, market-based
• Geographical division
• Process-based
• Matrix structure
• Circular structure
• Flat structure
• Network structure

Larger companies tend to adopt a functional structure as they tend to have more stable operations and a better-defined hierarchy.

On the other hand, startups and small companies may adopt a flat or matrix structure at first and eventually evolve over time.

Companies that see value in grouping employees with the same skills and expertise into the same functional unit will adopt a functional organizational structure giving clearer hierarchies to employees, better defining their roles, and reducing confusion in the workplace.

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Takeaways 

So there you have it folks!

What does a functional organizational structure mean?

In a nutshell, a functional organizational structure is a type of company structure where teams and employees are organized based on their functions.

In a company, you will typically have a finance department, human resource department, information technology, sales, and so on.

Companies divide the organization based on their functions, each function is headed by a functional manager, and employees are grouped according to their roles.

This type of structure is found commonly in larger organizations or those that tend to provide products and services in a relatively stable manner.

The overall success of a company largely depends on how well its employees, managers, directors, and executives define and execute their goals and tasks.

Now that you know what a functional organizational unit is and how it works, good luck with your research!

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